Antitrust Lawyer Blog Commentary on Current Developments

Articles Posted in Merger Highlights

On January 11, 2019, Congressman Peter Welch and Francis Rooney, members of Congress, wrote a letter to the Federal Trade Commission (“FTC”), urging the Commission to investigate Bristol-Myers Squibb’s (“BMS”) acquisition of Celgene.

The letter asks the FTC to examine how the transaction may harm competition with respect to horizontal overlaps and even complementary drugs.  Specifically, the letter points out that the acquisition allows BMS to increase its drug portfolio and leverage over pharmacy benefit managers (“PBMs”) when negotiating preferred drug placement on formularies and bundled discounts that can create “rebate walls”.

The transaction gives the FTC an opportunity to investigate a questionable contracting practice in the pharmaceutical drug industry known as a “rebate wall” or “rebate trap”.  Payors such as PBMs and health insurers obtain rebates on prescription drugs from pharmaceutical manufacturers that have actually inflated the price of drugs and stifled the ability of rival drug manufacturers to effectively compete.  This practice is recognized by both the administration and industry players as anticompetitive.  Department of Health and Human Services Secretary Alex Azar has noted that rebate walls can prevent competition and new entrants into the system. Moreover, major drug manufacturers such as Pfizer and Shire have filed antitrust suits challenging rebate walls as antitrust violations.  In theory, rebates could have a positive impact on the prescription drug market if they led to lower prices and benefit consumers.  But, in practice, this is simply not the case.  Rebate walls distort the workings of the free market, result in higher drug prices, and reduce patients’ access to affordable branded drugs.

The government shutdown is likely to delay FTC merger reviews, but the Department of Justice’s (“DOJ”) Second Request investigations will likely proceed as they normally do albeit with less staff.  Although the FTC’s Premerger Notification Office (PNO) and the DOJ’s Premerger Office remain open during regular hours to receive HSR filings, the FTC PNO will be operating with a limited staff and is unavailable to provide guidance about the administration of the HSR Act.  All merging parties have to wait the full initial waiting period before obtaining antitrust clearance, because the PNO is not granting early termination of waiting periods during the shutdown.

The staff attorneys who run investigations and negotiations at the Commission are out of the office, which means that parties are simply waiting while everything is on hold.  HSR waiting periods will continue to run during a government shutdown.  DOJ and FTC staff will continue to review premerger filings and conduct investigations to determine whether to challenge reported transactions under the antitrust laws.  Second Requests will continue to be issued and, if engaged in merger litigation, FTC and DOJ attorneys will notify opposing parties and the courts of the government shutdown and attempt to negotiate timing extensions and suspensions. If such relief is not available, they will continue to litigate the matter.

The DOJ and the FTC both issued contingency plans indicating that certain employees connected to antitrust enforcement within the Antitrust Division of the DOJ and the Bureau of Competition at the FTC will be excepted from the furlough and will continue to conduct antitrust enforcement activities.

On September 5, 2018, Judge Trevor N. McFadden of the United States District Court for the District of Columbia granted the Federal Trade Commission’s request for a preliminary injunction preventing Tronox Ltd. (“Tronox”) from completing its proposed $2.4 billion acquisition of National Titanium Dioxide Company Ltd. (“Cristal”) until after a final ruling in the FTC’s administrative proceedings challenging the deal.  Federal Trade Commission v. Tronox Ltd. (D.D.C. Sept. 12, 2018).  It is a huge victory for the FTC.

Background

On February 21, 2017, Tronox inked a deal to buy Cristal for $1.67 billion and a 24% stake in the new entity. The transaction would have created the largest TiO2 company in the world, based on titanium chemical sales and nameplate capacity.

On August 7, 2018, the FTC’s Bureau of Competition announced a new new Model Timing Agreement for its merger reviews.  This is part of its initiatives to streamline its merger review process.

New FTC Model Timing Agreement

Merger investigations typically involve timing agreements, which provide an agreed-upon framework for the timing of certain steps in the investigation. Timing agreements provide the FTC staff with notice of when the parties plan to close the deal. Both parties and staff benefit from having such a framework established shortly after issuance of the Second Request as it allows staff and the parties to engage in substantive discussions with more certainty about the timing.

On June 27, 2108, the Department of Justice’s Antitrust Division announced that The Walt Disney Company (“Disney”) agreed to divest 22 regional sports networks (“RSNs”) to resolve antitrust concerns with its approximately $71 billion acquisition of certain assets from Twenty First Century Fox (“21CF”).

Speedy Antitrust Approval

DOJ’s announcement of the settlement agreement is noteworthy because of the speed at which Disney was able to negotiate a remedy to a combination that raised a number of antitrust issues.  Though the parties received second requests on March 5, 2018, and Disney had only recently entered into a new agreement with 21CF on June 20, 2018, the DOJ and Disney were able to negotiate a divestiture worth approximately $20-23 billion within 6 months of review and 4 months after issuing information requests.  The dollar value of the Disney/21CF divestiture will likely double what the DOJ characterized as the largest divestiture in history in Bayer/Monsanto.

On March 15, 2018, the Department of Justice’s Antitrust Division filed a modified proposed final judgment (“MPFJ”) and responded to amici briefs filed in the Antitrust Procedures and Penalties Act (“Tunney Act”) proceedings regarding the DOJ’s settlement agreement that allowed Anheuser Busch InBev SA/NV’s (“ABI”) to acquire SABMiller.  In other words, the consent decree that was signed on July 20, 2016 between the Obama DOJ and the merging parties has yet to be approved by a federal court. One would think that the DOJ would move quicker on finalizing a consent decree that allowed the largest beer merger in history proceed.  But, here we are just about at the two-year mark without a finalized decree.

The DOJ permitted the merger of the two largest global brewers, which without a remedy threatened to reduce head-to-head competition between Anheuser Busch InBev SA/NV’s (“ABI”) and MillerCoors in local markets throughout the country.  The DOJ alleged that the elimination of competition between ABI and MillerCoors would increase ABI’s incentive and ability to disadvantage its remaining rivals – in particular, brewers of high-end beers that serve as an important constraint on ABI’s ability to raise its beer prices – by limiting or “impeding the distribution” of their beers, likely resulting in increased prices and fewer choices for consumers.   This allegation is significant because “effective distribution is important for a brewer to be competitive.”

To resolve these competitive concerns, the DOJ’s Proposed Final Judgment required the divestiture, which permanently cemented a duopoly where two suppliers exert control over approximately 85-90% of the distributors in the United States.  The DOJ further acknowledged in its Competitive Impact Statement (“CIS”) that ABI and Molson Coors have business arrangements and contacts throughout the world and that the divestiture may actually facilitate coordination.  Because of the increased likelihood of coordinated anticompetitive effects, the DOJ alleged that the merger “would increase ABI’s incentive and ability to disadvantage its beer rivals by impeding the distribution of its beers.”  Accordingly, the DOJ sought behavioral remedies, which are designed to keep beer distribution independent and open as well as to level the playing field for ABI’s high end rivals.

On June 5, 2018, the Federal Trade Commission (“FTC”) announced that Northrop Grumman’s (“Northrop”) $7.8 billion acquisition of aerospace and defense contractor Orbital ATK, a vertical merger that combined a supplier with its customer, could proceed so long as the Northrop agreed to certain behavioral remedies.

According to the complaint, Northrop is one of four companies capable of supplying the U.S. government with missile systems, including tactical missiles, strategic missiles and missile defense interceptors.  Orbital ATK is the premier supplier of solid rocket motors (“SRMs”), which propel missiles to their intended targets and are an essential input for missile systems.  The FTC’s complaint alleges that Northrop’s proposed acquisition of Orbital ATK would have reduced competition in the market for missile systems purchased by the U.S. government, resulting in less innovation and higher prices. The FTC was concerned that Northrop could raise prices on the motors on competitors or withhold them altogether, both of which the agency said would give the merged firm a clear advantage for missile contracts.  Additionally, “the acquisition creates a risk that the proprietary, competitively sensitive information of a rival (solid rocket motor) supplier supporting Northrop’s missile system business could be shared with Northrop’s vertically integrated SRM business.”

To resolve the vertical competition concerns, the FTC required several behavioral or conduct remedies.  First, Northrop was required to supply SRMs to competitors on a non-discriminatory basis.  Second, Northrop was required to separate the operation of its SRM business from the rest of the company’s operations with a firewall.  Third, the settlement agreement provides for the U.S. Department of Defense (“DOD”) to appoint a compliance officer to oversee Northrop’s conduct pursuant to the settlement.  Fourth, the FTC required the merging parties to implement a compliance program and create regular compliance reports, to be submitted to the FTC, the DOD and the compliance officer.  The FTC said that by ensuring that other missile suppliers can continue to compete, the settlement preserves the procompetitive benefits of the transaction while addressing the potential anticompetitive harms.

On June 7, 2018, the DOJ’s Makan Delrahim sought to reassure investors that worries that regulators would crack down on proposed vertical combinations were over-blown.  “I understand that some journalists and observers have recently expressed concern that the Antitrust Division no longer believes that vertical mergers can be efficient and beneficial to competition and consumers,” he said.  Noting that some point at the decision to sue to block AT&T from buying Time Warner “as a supposed bellwether”, Delrahim said: “rest assured these concerns are misplaced.”

So, is the Antitrust Division only concerned about vertical mergers in the media industry?

On May 29, 2018, the DOJ approved Bayer’s acquisition of Monsanto with a $9 billion asset divestiture.

Background

In September 2016, Bayer agreed to acquire Monsanto.  Bayer and Monsanto overlapped in the research, development, and marketing of seeds, crop protection chemicals, and related agricultural products.  The principal areas of competitive concern related to the seeds business.  The seeds and crop protection businesses are highly concentrated in the United States so from the get go Bayer knew that it needed to propose a comprehensive and complex remedy to resolve the antitrust concerns.

More Fallout From The Ill-Advised Tuna Merger

On May 16, 2018, the Department of Justice (“DOJ”) announced that a federal grand jury returned an indictment against Christopher Lischewski, the President and CEO of Bumble Bee Foods LLC (“Bumble Bee”), for participating in a conspiracy to fix prices for packaged seafood sold in the United States.

The indictment, filed in the U.S. District Court for the Northern District of California in San Francisco, charges Lischewski with participating in a conspiracy to fix prices of packaged seafood beginning in or about November 2010 until December 2013.  The one-count felony indictment charges that Lischewski carried out the conspiracy by agreeing to fix the prices of packaged seafood during meetings and other communications.  The co-conspirators issued price announcements and pricing guidance in accordance with these agreements.

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